SEWERAGE AND WATER BOARD OF NEW ORLEANS · 2018-08-23 · Sewerage and Water Board of New Orleans - 2 - Financial Plan and Rate Study 2011-2020 escalation will result in the systems’

SEWERAGE AND WATER BOARD OF

NEW ORLEANSFinancial Plan and Rate Study 2011-2020Updated September 28, 2011Revised April 30, 2012

Financial Plan and Rate Study 2011-2020 - i -Sewerage and Water Board of New Orleans

1. Executive Summary ........................................................................................................................................................1 1.1ScopeofReport................................................................................................................................................................... 1 1.2SystemObligations............................................................................................................................................................ 2 1.3FundingRequirements..................................................................................................................................................... 2 1.3.1WaterSystem................................................................................................................................................... 2 1.3.2SewerageSystem........................................................................................................................................... 4 1.3.3DrainageSystemFundingPlan................................................................................................................. 4 1.4WaterLossAudit.................................................................................................................................................................. 4 1.5O&MReview.......................................................................................................................................................................... 4 1.6CapitalReview...................................................................................................................................................................... 4 1.7FindingsandObservations............................................................................................................................................. 7

2. System Overviews ...........................................................................................................................................................8 2.1WaterSystemAssets.......................................................................................................................................................... 8 2.2WaterSystemProjects....................................................................................................................................................... 8 2.2.1TreatmentPlantRehabilitation................................................................................................................. 8 2.2.2DistributionSystemReplacementandRehabilitation..................................................................... 9 2.2.3AutomatedMeterReading......................................................................................................................... 9 2.3SewerageSystemAssets.................................................................................................................................................. 9 2.4SewerageSystemProjects............................................................................................................................................... 9 2.4.1SewerSystemEvaluationandRehabilitationProgram(SSERP).................................................... 9 2.4.2ProtectionBermaroundtheEastBankSewageTreatmentPlant..............................................10 2.4.3WetlandsAssimilationProject.................................................................................................................10 2.4.4ReplacementandRehabilitationofSewerCollectionSystem....................................................10 2.5DrainageSystemAssets..................................................................................................................................................10 2.6DrainageSystemProjects..............................................................................................................................................11 2.6.1SoutheastLouisianaFloodControlProgram.....................................................................................11 2.6.2PermanentPumpStationsatLakePontchartrain............................................................................12 2.6.3GulfIntracoastalWaterway(GIWW)WestClosureComplex........................................................13 2.6.4ReplacementofAgingPowerEquipment...........................................................................................13

3. Revenue Requirements ................................................................................................................................................15 3.1DataSources.......................................................................................................................................................................15 3.2OperatingandMaintenanceAllocation...................................................................................................................16 3.3OperatingandMaintenanceExpenses.....................................................................................................................16 3.4CapitalImprovementPlans...........................................................................................................................................21 3.4.1WaterCapitalImprovementPlan...........................................................................................................23 3.4.2SewerageCapitalImprovementPlan...................................................................................................23 3.4.3DrainageCapitalImprovementPlan.....................................................................................................23

4. Billable Units ..................................................................................................................................................24

5. Rate Structure ................................................................................................................................................26 5.1FixedCharge.......................................................................................................................................................................26 5.2VolumetricRateStructure..............................................................................................................................................27 5.3CurrentWaterRateStructure........................................................................................................................................27 5.3.1WaterServiceCharge..................................................................................................................................27

TABLE OF CONTENTS

Financial Plan and Rate Study 2011-2020 - ii -Sewerage and Water Board of New Orleans

5.3.2WaterVolumetricCharge..........................................................................................................................28 5.4WholesaleCharge.............................................................................................................................................................28 5.5CurrentSewerageRateStructure...............................................................................................................................28 5.5.1SewerageServiceCharge.........................................................................................................................28 5.5.2SewerageVolumeCharge.........................................................................................................................29

6. Financial Plan .................................................................................................................................................30 6.1FinancialPerformanceTargets.....................................................................................................................................30 6.2KeyForecastAssumptions.............................................................................................................................................30 6.3WaterSystemFinancialPlan.........................................................................................................................................31 6.3.1WaterRevenueunderExistingRates....................................................................................................31 6.3.2Non-RateRevenues.....................................................................................................................................31 6.3.3FEMAReimbursements..............................................................................................................................31 6.3.4O&MExpenses..............................................................................................................................................31 6.3.5DebtService...................................................................................................................................................31 6.3.6OtherRevenueRequirements.................................................................................................................32 6.3.7RevenueIncreases.......................................................................................................................................32 6.3.8WaterSystemCIPFinancingPlan...........................................................................................................32 6.4SewerageSystemFinancialPlan.................................................................................................................................32 6.4.1SewerageRevenueUnderExistingRates............................................................................................32 6.4.2Non-RateRevenues.....................................................................................................................................35 6.4.3FEMAReimbursements..............................................................................................................................35 6.4.4O&MExpenses..............................................................................................................................................35 6.4.5DebtService...................................................................................................................................................35 6.4.6OtherRevenueRequirements.................................................................................................................35 6.4.7RevenueIncreases.......................................................................................................................................36 6.4.8SewerageSystemCIPFinancingPlan...................................................................................................36 6.5DrainageFinancingPlan................................................................................................................................................36 6.5.1DrainageCIPFinancingPlan....................................................................................................................40

7. Recommended Rates .....................................................................................................................................42 7.1WaterandSewerageRateRecommendations.......................................................................................................42 7.1.1CustomerImpacts........................................................................................................................................42 7.2DrainageFeeOptionsandImpacts............................................................................................................................42 7.2.1PotentialDrainageFeeImpacts..............................................................................................................45 7.2.2DrainageServiceFeeStudyin1998......................................................................................................46 7.2.3LegalMattersRegardingImplementationofDrainageFees.......................................................47 7.3SupportforRecommendedRates..............................................................................................................................47

8. Comparison to Peer Utilities .........................................................................................................................48 8.1MetricComparisons.........................................................................................................................................................49 8.2MetricBenchmarkingObservations..........................................................................................................................49

9. Conclusions ....................................................................................................................................................51

AppendicesAppendixA:WaterAuditFY2008-2010AppendixB:O&MReviewReportAppendixC:CapitalProgramsReviewReportAppendixD:O&MCostAllocationsAppendixE:O&MBudget

Financial Plan and Rate Study 2011-2020 - iii -Sewerage and Water Board of New Orleans

Table1.1–AnnualWaterRevenueRequirements............................................................................................................................ 3Table1.2–AnnualSewerageRevenueRequirements................................................................................................................... 5Table1.3–AnnualDrainageRevenueRequirements..................................................................................................................... 6

Figure2.1–SWBNODrainageServiceArea......................................................................................................................................11Table2.1–EstimatedSELARepaymentSchedule..........................................................................................................................12

Table3.1–ProjectedBaselineO&MExpense...................................................................................................................................16Table3.2–ForecastofWaterO&MExpenses...................................................................................................................................18Table3.3–BenchmarkWaterO&MExpenses..................................................................................................................................19Table3.4–ForecastofSewerageO&MExpenses...........................................................................................................................20Table3.5–BenchmarkSewerageO&MExpenses..........................................................................................................................21Table3.6–ForecastofDrainageO&MExpenses............................................................................................................................22Chart3.1–WaterCapitalImprovementPlan(in2011dollars)..................................................................................................23Chart3.2–SewerageCapitalImprovementPlan(in2011dollars)..........................................................................................23Chart3.3–DrainageSystemCapitalImprovementPlan(in2010dollars)............................................................................23

Table4.1–GrowthandResistanceFactors.......................................................................................................................................25Table4.2–WaterandSewerRevenuesExcludingRateIncreases............................................................................................25

Table5.1–MonthlyWaterServiceCharges......................................................................................................................................28Table5.2–WaterVolumetricCharge..................................................................................................................................................28Table5.3–MonthlySewerageServiceCharges..............................................................................................................................28

Table6.1–WaterFinancingPlan..........................................................................................................................................................33Table6.2–WaterCIPFinancingPlan...................................................................................................................................................34Table6.3–SewerageFinancingPlan.................................................................................................................................................37Table6.4–SewerageCIPFinancingPlan...........................................................................................................................................38Table6.5–DrainageSystemFinancingPlanwithaDrainageFee...........................................................................................39Table6.6–DrainageFeeCIPFinancingPlan....................................................................................................................................41

Table7.1–ProposedWaterRatesandCharges...............................................................................................................................43Table7.2–ProposedSewerageRatesandCharges......................................................................................................................43Table7.3–ProjectedWaterandSewerageCustomerImpacts.................................................................................................44Table7.4–EstimatedDrainageFees...................................................................................................................................................45

Table8.1–ListofBenchmarkingUtilities..........................................................................................................................................48Table8.2–MetricComparisons............................................................................................................................................................50

TABLE OF FIGURES

Financial Plan and Rate Study 2011-2020 - 1 -Sewerage and Water Board of New Orleans

1

EXECUTIVE SUMMARY

to worsen unless additional financial resources are provided.

The Board was facing the typical problems related to aging infrastructure and increasing regulations prior to Hurricane Katrina. The financial condition of the Board was reason-ably strong and the Board had financial reserves in place that allowed for initial recovery activities to proceed quickly following Hurricane Katrina. However, with the loss of a substantial portion of its customer revenue base combined with sharply increased operating and maintenance expenses and capital requirements, the financial condition of the Board deteriorated rapidly. Federal and State funds, while significant, have been much less than what was needed to re-pair or replace what was damaged or destroyed, and drastic cost cutting measures have provided only a portion of the resources needed to meet these challenges.

Following Notices of Material Event issued by the Board of Liquidation, City Debt for failure to meet bond covenants for debt service coverage for water and sewer system bonds, the Board engaged Raftelis Financial Consultants, Inc. (RFC) to perform a comprehensive financial plan and rate study analysis of the water, sewerage, and drainage systems. RFC is a nationally recognized financial consulting firm for water, wastewater, and storm water utilities. The purpose of the analysis was to identify the financial requirements for the systems over the next ten years and to develop rec-ommended approaches for fully funding the requirements while achieving financial results consistent with a bond rat-ing of AA. This report provides findings and observations that document these requirements as well as recommenda-tions and conclusions about alternatives for funding them.

1.1 ScopeofReportThe Sewerage and Water Board of New Orleans (SWBNO or Board) engaged Raftelis Financial Consultants, Inc. (RFC) to perform a comprehensive financial planning and rate study for the water, sewerage, and drainage systems for 2011-2020. The project included the following components:

This report was originally published on September 28, 2011 and was subsequently revised on February 2, 2012 to reflect four significant changes to assumptions regarding the data in the financial models that occurred in December 2011: 1) the drainage system millages were rolled forward by the City Council, resulting in an increase in revenues for 2012 and beyond; 2) a loan to the sewer system from the Louisiana Department of Environmental Quality for $9,000,000 has been approved and closed; 3) a commitment of federal hazard mitigation funds of approximately $100 million for the power plant has been announced; and 4) the request for extension of payment for the GOZone loan was denied and debt service will begin in 2012. The report was revised again on April 30, 2012, to reflect three additional changes to the data in the fi-nancial models that occurred following the completion of the 2011 audited financial statements: 5) the audited results for 2011 revenues, expenses, and cash balances replaced previ-ous estimated amounts; 6) the amount and timing of liability judgments were lowered to reflect audited results and were ac-celerated to allow for repayment sooner; and 7) the timing of amounts owed to the Department of Public Works were accel-erated to allow for repayment sooner.

The Sewerage and Water Board of New Orleans (SWBNO or Board) is responsible for providing safe drinking water in Orleans Parish, removing wastewater for safe return to the environment, draining away storm water, providing water for fire protection, and providing information about its products and services. Currently, the Board does not have adequate financial resources to meet the capital and operating requirements of the drinking water, wastewa-ter, and storm water systems. As a result, the condition of the systems continues to degrade, customer perception of services provided remains below satisfactory levels, and financial institutions are unwilling to provide additional borrowed capital. The Board cannot continue to defer necessary operating and capital initiatives without seriously and adversely affecting its ability to deliver reliable, sustain-able, and necessary services. This condition will continue


escalation will result in the systems’ annual revenue require-ments, exclusive of revenue-financed capital, increasing from $166.2 million in 2011 to $354.6 million in 2020.

1.3 FundingRequirementsThe Board has traditionally used a five-year program of rate increases to fund water and sewerage system revenue re-quirements. RFC has expanded that approach by looking at a ten-year planning horizon, while still using a five-year program of recommended rate increases and supplementing that with a five-year plan of subsequent rate increases. It is critically important to look at funding requirements beyond the initial five years as bond issues that occur in the first five years will have debt service requirements that need to be funded in the second five years. RFC has identified and an-alyzed options for front-loading the rate changes in the first year, implementing the increases in alternating years, and implementing the increases in equal percentage amounts in each of the next five years.

1.3.1 Water SystemIn order to operate and maintain the water system on a sus-tainable and resilient basis, it will be necessary to restore staffing levels, training activities, and preventative mainte-nance programs that were eliminated following Hurricane Katrina. These actions will result in increased O&M ex-penses from the current levels. The amount of additional O&M expenses was based on the gap between the existing funding and industry metrics for cost per million gallons of water treated by the top quartile of most efficient utili-ties. Offsetting the additional O&M funding requirement will be the savings resulting from improved efficiency as-sociated with capital improvements and reduced water loss, which will help decrease the baseline O&M costs. Both the additional O&M expenses and the decrease due to gained efficiencies are incorporated in the revenue require-ments projection summarized in Table 1.1. The revenue requirements also include the existing debt service and the proposed debt service to fund the water capital improve-ment plan. Assuming level increases for the five-year program, the necessary rate increases for 2012 through 2016 have been calculated to be 12% for each year. These rate increases will increase revenues by $36.4 million by 2016. Lower increas-es will be necessary in 2017 through 2020 as the capital plan stabilizes and after the O&M expenses reach the appropri-ate level.

1. Assess water loss;2. Identify / validate revenue requirements;3. Project pumping volume, water usage, and demand factors;4. Review capital programs;5. Develop Comprehensive Financial Plans;6. Develop rates for the water, sewerage, and drainage

utilities;7. Create and execute a Public Information Plan;8. Produce Final Report; and9. Train Budget Department Staff on financial planning

tools and rate models.

This report satisfies component 8 by summarizing compo-nents 1 through 6.

1.2 SystemObligationsThe Board is confronted by eight major financial obligations associated with constructing, operating, and maintaining the systems over the next ten years:

1. Replacement and rehabilitation of portions of the sys-tems damaged or destroyed by Hurricane Katrina;

2. Completion of the Sewer System Evaluation and Reha-bilitation Program (SSERP);

3. Operation and maintenance (O&M) expenditures to provide sustainable and resilient service;

4. Repayment of the Orleans Parish portion of the South-eastern Louisiana (SELA) Flood Control Program construction costs;

5. O&M costs of the Permanent Pump Stations at Lake Pontchartrain;

6. Participation in O&M costs of the Gulf Intracoastal Wa-terway West Closure Complex (West Closure);

7. Replacement of aging power generation and transmis-sion equipment used to operate pumps during storm events; and

8. Repayment to City of New Orleans Department of Public Works for water and sewer system projects con-structed during street paving projects.

The capital costs associated with these projects from 2012 to 2020 will be almost $2.06 billion in 2011 dollars. Even though a significant portion of the projects will be funded from other sources, primarily the federal government, the annual debt service on the Board’s obligations will reach $123.7 million by 2020. In addition, these projects and other initiatives will add almost $40.6 million annually to the operating budget. Combined, the debt service ob-ligations, additional O&M, and anticipated normal cost


Tabl

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ater

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enue

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beginning in 2015 (New Levy Plan).

1.4 WaterLossAuditAt the direction of the Board, the Project Team conducted an initial water loss audit. Freeman, LLC, an expert on wa-ter loss issues, prepared the analysis according to American Water Works Association Water Loss Control Standards. The objective of the study was not simply to calculate the water loss index and compare it to other utilities. Such an analysis would not be necessary because it is not disputable that the Board has extremely high water loss. Instead, the goal of the study was to develop a baseline using 2008, 2009, and 2010 data and establish a mechanism for future analy-ses. As the Board continues to focus on this issue, the water loss audit will provide a mechanism by which the Board can track its progress. This metric should also provide insight as to whether future expenditures are helping to alleviate the current problems. The water loss audit report is included as Appendix A.

1.5 O&MReviewThe Project Team also evaluated the Board’s operations to determine whether the level of operations and associated cost was sufficient to provide an appropriate level of service on a sustainable basis. The analysis focused on the number of employees within different operating functions, such as at the treatment plants and the distribution and collection sys-tems. IMS Engineers, whose representative evaluated the system in 2000 when the City was considering privatizing utility operations, led this analysis. The Operations Analy-sis indicated that the Board needs to commit additional funds to the operation and maintenance of the system in order to provide an appropriate level of service in a sustain-able manner. The Operations Analysis report is included as Appendix B.

1.6 CapitalReviewDeferring capital improvements for replacement or reha-bilitation of aging infrastructure in order to postpone the need for rate increases is a common practice of utilities throughout the country. The Board has used this approach, particularly following Hurricane Katrina, to allow for existing rates to remain in place while the customer base was restored. The approach, while quite necessary in this circumstance, is not a sustainable solution. The Project Team performed a multi-dimensional review of the capi-tal program developed and prioritized by the Board staff. One dimension was to see if the prioritization process

1.3.2 Sewerage SystemAs with the water system, the sewerage system also needs additional O&M expenditures to function on a sustain-able and resilient basis. The additional O&M expenses are similarly based on the gap between existing funding and industry metrics for cost per million gallons of sewerage treated for the top quartile of most efficient utilities. The additional O&M expenses and the reduction in expenses due to gained efficiencies are included in the revenue re-quirements projection shown in Table 1.2. The revenue requirements also include the existing debt service and the proposed debt service to fund the sewerage capital im-provement plan.

Assuming level increases for the five-year program, the necessary rate increases for 2012 through 2016 have been calculated to be 13% for each year. These rate increases will increase revenues by $50.7 million by 2016. Lower increas-es will be necessary in 2017 through 2020 as the capital plan stabilizes and after the O&M expenses reach the ap-propriate level.

1.3.3 Drainage System Funding PlanAs construction of the three Lakefront Permanent Pump Stations and West Closure projects by the U.S. Army Corps of Engineers is completed, the Board will face $12.0 million annually in additional O&M expenses. Likewise, as por-tions of the SELA Flood Control Program are constructed the Board will be required to fund $15.4 million annually in additional debt service. These increased requirements over the forecast period are shown in Table 1.3.

RFC identified three potential approaches to fund the ad-ditional requirements of the drainage system. The plans are not mutually exclusive and combinations of the plans may be used to satisfy the drainage system’s financial obligations. The Board anticipates receiving an additional $1.9 million based on an approved roll forward following the 2011 reas-sessment (2011 Assessment Plan). The drainage system will not need additional revenues to fund its projected O&M or capital requirements in 2012. The Board would also need to seek a new mill levy or implement a drainage fee to generate sufficient revenues in future years. Focus-ing on a new drainage fee to generate the needed additional revenue (Drainage Fee Plan) is also a potential solution. Under the Drainage Fee Plan, this new revenue source will be needed beginning in 2013. The Board could seek a new mill levy to generate approximately $15 million annually


Tabl

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ewer

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ents


Tabl

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ents


lected to facilitate its assessment and billing. The collection and maintenance of this data requires significant time, so the Board should begin to focus on determining the param-eters of, and implementation plan for, a drainage fee system.

4. Continue pursuit of state and federal funding. The Board has been successful in securing significant financial as-sistance from a broad spectrum of state and federal agencies for infrastructure. These efforts are important and should not be dampened with adoption of the identified rate in-crease programs and the drainage fee program. To the extent that the Board may obtain additional financial assistance, fu-ture expenditures and service improvements can be funded while mitigating the financial burdens placed on customers and tax payers. This effort should remain an important com-ponent of the Board’s financial management strategy.

5. Increase O&M expenditures to levels consistent with industry standards. The Operations Review found that the Board does not have sufficient staffing levels within many of its divisions relative to industry standards. This finding is consistent with benchmarking of O&M costs with comparable utilities. Therefore, the Board should increase O&M expenditures so that the water and sewerage systems will remain sustainable.

6. Analyze water loss annually. As expected, the wa-ter loss audit found that the Board is losing significant amounts of water. The Board needs to annually monitor and manage water loss based on the approach outlined as part of the audit to assure its customers that it is striving to remedy this issue.

While each section of this report provides support for these Findings and Observations, Section 6 – Financial Plan provides a discussion of the most important policy issues and results.

for projects was appropriate. Another dimension was to determine, at a high level, if the cost estimates and project timing were reasonable. The Board recently developed and implemented a prioritization process and this review found that the Board’s capital program was developed in a system-atic manner consistent with industry practices. The Capital Project Review Report is included as Appendix C.

1.7 FindingsandObservationsThe funding plans described above outline approaches to restore the financial health and sustainability of the Board’s water, sewerage, and drainage systems. RFC believes the following courses of action are available.

1. Implement five-year water rate increase program. The water financial plan identifies the need for annual 12% rate increases in each of the next five years beginning July 1, 2012 to generate the revenues necessary for the Board to maintain a financially sustainable water system. These rate increases will be across-the-board so all customers and cus-tomer classes will have the same percentage impact. Even though the cost burden will increase for residential custom-ers, a typical customer will still have a monthly bill that is less than 1.5% of the median household income for New Orleans.

2. Implement five-year sewerage rate increase program. The sewerage financial plan identifies the need for annual 13% rate increases in each of the next five years beginning July 1, 2012 to generate the revenues necessary for the Board to maintain a financially sustainable sewerage sys-tem. These rate increases will also be across-the-board so all customers and customer classes will have the same percent-age impact. Even though the cost burden will increase for residential customers, a typical customer will still have a monthly bill that is less than 2.0% of the median household income for New Orleans.

3. Implement a drainage service fee to supplement existing millages. A drainage service fee is considered a more equitable funding option, in that it would reflect the burden that each property within the Parish (taxable and tax-exempt) places on the drainage system. A reasonable goal may be for the existing millages to pay for construc-tion of the drainage system (debt service and cash-financed capital improvements) while the drainage fee pays for operating and maintaining the system. Implementing a drainage fee will require additional information to be col-


people on the east bank of Orleans Parish and approximate-ly 57,000 people on the west bank. The quality of finished water and river water is tested daily at the Water Quality Laboratory of the Board by a staff of chemists, microbiol-ogists and technicians. Samples of drinking water from various points in the distribution system are also analyzed for chemical and microbial parameters at regularly sched-uled times.

2.2 WaterSystemProjectsThere are three major projects that are currently underway or planned that will rehabilitate and update the Board’s wa-ter system. These projects are:

> Treatment Plant and Finished Water Pumping Reha-bilitation;

> Distribution System Replacement and Rehabilita-tion; and

> Automated Meter Reading.

This section provides brief descriptions of these projects, summarizes their capital and projected operating costs, and outlines the cost-sharing agreements under which they will be financed.

2.2.1 Treatment Plant and Finished Water Pumping RehabilitationRoutine rehabilitation of equipment, basins, and filters is needed at the Carrollton and Algiers plants due to age and normal wear. In addition, water security plant improve-

SWBNO was created in 1899 by Louisiana State Statutes and established as a “special board” operating independently of the government of the City of New Orleans. The Board of Directors includes 13 members – the Mayor of New Or-leans, who serves as the President of the Board of Directors; two representatives of the Board of Liquidation, City Debt of the City of New Orleans; three representatives of the New Orleans City Council; and seven appointees. Even though SWBNO is a political subdivision of the State of Louisiana, SWBNO must obtain approval by the Board of Liquidation City Debt and the City Council of New Orleans to issue debt, modify millages, or increase rates and charges.

2.1 WaterSystemAssetsThe water system has two treatment plants. The Carrollton Water Purification Plant (Carrollton Plant) normally treats about 140 million gallons per day of finished water for the east bank of Orleans Parish. Raw water from the Missis-sippi River is pumped to the Carrollton Plant from both the Oak Street River Station and the Industrial Avenue River Station. The Algiers Plant, which serves the predominantly residential west bank portion of the parish, purifies about 10 million gallons per day of water. Combined, the two plants treat approximately 47 billion gallons of water per year, removing 20,000 tons of solid material from the raw river water.

The treated water at the two plants is pumped through more than 1,590 miles of mains to more than 124,725 serv-ice connections. It is delivered to approximately 291,000

2

SYSTEM OVERVIEWS


of the nation's major metropolitan areas, New Orleans' un-derground water and sewer systems are at least 40 years old and, in some cases, over 100 years old. Factors common to this area, such as unstable soil conditions and large numbers of tree roots, contribute to a higher-than-normal number of breaks and deterioration of the sewer pipes.

2.4 SewerageSystemProjectsThere are four major projects that are currently underway or planned that will rehabilitate and update the Board’s sewer-age system. These projects are:

> Sewer System Evaluation and Rehabilitation Program (SSERP);

> Protection Berm around the East Bank Sewage Treat-ment Plant;

> Wetlands Assimilation Project; and > Replacement and Rehabilitation of Sewer Collection

System.


2.4.1 Sewer System Evaluation and Rehabilitation Program (SSERP)The Board has undertaken a multi-year program, the Sewer System Evaluation and Rehabilitation Program (SSERP), to identify and address structural and mechanical deficiencies in the wastewater collection system. The SSERP, underway since 1996, is part of the EPA Consent Decree the Board signed in 1998. With the implementation of repairs identi-fied and completed in the SSERP, the Board will not only be in compliance with federal regulations, but will also be accomplishing its goals of protecting the environment and increasing the sustainability of the sewer system.

Hurricane Katrina also caused extensive damage to the sew-er collection system. As evidenced by the extent of damage in the areas where SSERP repairs had not yet been com-pleted, it is clear that the work completed under the SSERP is greatly improving the resiliency and dependability of the sewer system. Work under the SSERP was interrupted fol-lowing the storm, and the Board invoked Force Majeure with respect to its obligations under the Consent Decree. On March 22, 2010, the Board entered into a Modified Con-sent Decree (MCD) that maintains the same basic structure

ments are planned over the next several years.

2.2.2 Distribution System Replacement and RehabilitationThe underground pipes of the water system were severely damaged during the flooding following Hurricane Katrina. The weight of the floodwaters caused soils to subside and pavements to buckle, creating problems that continue to arise even now. Leaks are investigated and prioritized, but a shortage of funding and personnel requires many leaks to remain unrepaired for several months. The Board has worked diligently with FEMA and anticipates significant progress in this area as a result of a shift from point repairs to line replacements.

2.2.3 Automated Meter ReadingCustomer satisfaction is significantly impaired when bills are estimated because usage based on actual meter readings is not available. This problem is compounded when an ac-count is estimated for several months consecutively. The Board is making progress on this and is currently reading about 97.5% of all meters every month. Billing accuracy that meets customer expectations requires accurate meters and timely and accurate meter readings. Change-out of existing manual-read meters with electronic meters and installation of an automated meter reading system would allow all meters to be read electronically.

2.3 SewerageSystemAssetsThe flat New Orleans topography has required a robust sys-tem for sewage collection and disposal. The sanitary sewer system of the City is a gravity collection system, consisting of 1,517 miles of lateral and trunk sewers, ranging in size from 8 inches to 7 feet in diameter. Lifting and conveying the sewage by trunk sewers and sewer force mains requires 84 pumping and lift stations.

The Board has two sewage treatment plants, one on the East Bank and one in Algiers, with a combined treatment capacity of 132 million gallons per day. The plants are currently oper-ated by a private contract operator. Both plants were built in the 1970s and have been upgraded, modernized, and ex-panded to increase capacity and to keep up with the growth of the city. The plants discharge treated wastewater into the Mississippi River.

The Board began a major rehabilitation and capacity upgrade of its aging sewage collection system in 1996. Like most


construction of MR-GO due to the resulting saltwater intru-sion. Hurricane Katrina exacerbated the damage to the once productive cypress swamp. The wetlands now require fresh water and nutrients to restore and maintain the cypress swamps that protect both parishes. Currently, nutrient rich effluent from both parishes is discharged to the Mississippi River where it contributes to the hypoxia, or dead zone, in the Northern Gulf of Mexico. Rerouting the effluent will allow the nutrients to be used to replenish the wetlands, rather than increasing damage to the coastal environment.

2.4.4 Replacement and Rehabilitation of Sewer Collection SystemSimilar to the water distribution system, the sewer col-lection system was severely damaged during the flooding following Hurricane Katrina. FEMA will continue to fund replacement and rehabilitation of the damaged lines that were not already part of the SSERP program.

2.5 DrainageSystemAssetsThe topography of the City of New Orleans is relatively flat, with levees along the Mississippi River and Lake Pontchar-train to protect the City from flooding due to overflow from

the river or storm surge from the lake. The unique geographic lay-out requires that all storm water runoff be lifted or pumped from the City.

The Drainage System dates back to the turn of the 20th century. In 1896, the New Or-leans Drainage Commission was organized to carry out a master drainage plan that had been developed for the City of New Orleans. In 1903, the Drainage Commission merged with the Sewerage and Water Board to consolidate drainage, water, and sewerage programs under one agency for more effi-cient operations. This combined organization retained the title

Sewerage and Water Board, and remains as such today. The Board is responsible for the drainage pumps and drainage lines 36” or larger. The City’s Department of Public Works

of the original 1998 Decree. The MCD set new schedules for completing the remediation of the sewer system by July 31, 2015.

This program addresses problems that existed prior to Hur-ricane Katrina and will be financed through Board funds.

2.4.2 Protection Berm around the East Bank Sewage Treatment PlantA project funded by FEMA will construct a protection berm around the East Bank Sewage Treatment Plant in order to allow continued primary and secondary treatment during a major flood event. Hurricane Katrina sent an estimated 17-foot high wave of storm surge down the length of the Mississippi River Gulf Outlet (MR-GO) from the Gulf to its end in the Industrial Canal connecting the river with Lake Pontchartrain. The storm surge destroyed the plant, which is located between the MR-GO and the Lower Ninth Ward.

2.4.3 Wetlands Assimilation ProjectThis grant-funded project will restore critical cypress wet-lands between the 40-Arpent Levee and the MR-GO Levee in Orleans and St. Bernard Parishes using assimilation of

wastewater effluent. This area has been determined to be critical for levee protection against storm surge and storm generated waves. Wetland loss in this area began after the


2.6 DrainageSystemProjectsThere are four major projects that are currently underway or planned that will rehabilitate and/or expand the capacity of the Board’s drainage system. These projects are:

> Southeast Louisiana Flood Control Program; > Permanent Pump Stations at Lake Pontchartrain; > Gulf Intracoastal Waterway West Closure Complex; and > Replacement of Aging Power Equipment.


2.6.1 Southeast Louisiana Flood Control ProgramThe purpose of the Southeast Louisiana Flood Control Program is to reduce damages due to rainfall flooding in Orleans, Jefferson, and St. Tammany parishes. The pro-posed work is located on both the east and west banks of the Mississippi River in Orleans and Jefferson parishes. In

is responsible for catch basins and drainage lines up to 36”. Currently, the Board is responsible for providing drainage service to all of Orleans Parish and portions of Jefferson Parish (approximately 2,400 acres). The service area within Orleans Parish is depicted in Figure 2.1.

There are 24 drainage pumping stations in New Orleans. There are also 13 underpass stations, each with two or three pumps, which are automatically triggered by rising water. Because the river levees are higher than the lake levees, most rainwater is pumped into Lake Pontchartrain. Excep-tions are the two West Bank pumping stations and two stations in Eastern New Orleans, that pump rainwater into the Intracoastal Waterway or the Industrial Canal.

The system's pumping capacity is over 29 billion gallons a day, enough to empty a 10 square mile lake that is 13.5 feet deep every 24 hours. That flow rate (over 50,000 cubic feet per second or cfs) is more than the flow rate of the Ohio River, the nation's fifth largest river. The SWBNO’s drain-age network includes approximately 100 miles of open canals and 100 miles of closed canals.

Figure 2.1 – SWBNO Drainage Service Area


Table 2.1 – Estimated SELA Repayment Schedule

2012 $02013 $1,300,0002014 $3,900,0002015 $7,800,0002016 $12,875,0002017 $15,350,0002018 $15,350,0002019 $15,350,0002020 $15,350,000

The SELA Program also includes $124 million in stormproofing that will result in annual O&M costs which mustbe covered by the Board. Note that the storm proofingprojectsdonotrequireapaybackbytheBoard.

2.6.2 Permanent Pump Stations at Lake PontchartrainInMarch2010,theStateofLouisianaandtheCorpssigneda Project Partnership Agreement for the Permanent CanalClosuresandPumpStationsatthethreeoutfallcanals.Thetemporary gates and pumps at the three outfall canals willbe replaced by permanent facilities intended to preventstormsurgeenteringfromLakePontchartrainandprovide

Orleans Parish, plans involveimproving twelve major drain-age canals, adding pumpingcapacity to one pump station,and constructing two new pumpstations. SELA was authorizedin1996bytheUnitedStatesCon-gress and is administered undera project cooperation agreementbetween the Board and theUnited States Army Corps of En-gineers (Corps). The LouisianaCoastal Protection Authority is apartneringagency.

SELA consists of several individ-ual project components that arebeing designed and constructedthroughout the tri-parish area.The Project Cooperation Agree-ment executed by the Board inJanuary 1997 required that theFederal government provide 75% of the total project costoftheSELAprojectsinOrleansParish,andthattheBoardprovide 25%. In the years immediately preceding Hurri-caneKatrina,theFederalfundingleveldidnotsupportthestartofprojects thathadbeenapprovedasSELAprojectsin Orleans Parish. In the aftermath of Hurricane Katrina,Congress,viaPublicLaw(PL)109-148theFloodControl& Coastal Emergency (FC&CE) 3rd Supplemental Ap-propriation, appropriated $224.8 million to accelerate thecompletion of SELA. This appropriation was 100% feder-ally funded. Because of the increased construction costin southeast Louisiana as the region rebuilds from Hur-ricane Katrina, the 3rd Supplemental Appropriation wasnot enough to fund the remaining project components ofSELA.Subsequently,in2008Congressappropriatedanad-ditional$1.3billionforSELAthroughPL110-252andPL110-329,the6th&7thSupplementalAppropriations.

The total amount appropriated for Orleans parish is ap-proximately$800million.Thefundsaretobecostsharedat65%Federaland35%Boardwithpaybackviaa30-yearplangranted by the Administration. The Board is obligated topaybackitscostsharefortheseprojectsuponcompletionoftheconstructionworkineachdrainagebasin. ThecurrentestimatedschedulefortheBoard’srepaymentfortheSELAprojectsoverthenexttenyearsisshowninTable2.1.


the confluence of the Harvey and Algiers Canals, the complex will include flood-walls, navigable gates, earthen levees, and a pump station with a capacity of 20,000 cfs. The largest feature of the facilities is the closure complex that will cross the GIWW, a federally main-tained navigation channel. The closure complex will include a primary 225-foot navigation gate and a secondary 75-foot to 110- foot gate. A permanent bypass channel and a 20,000 cfs pump station will be included in the construction. The

estimated cost of the Board’s share of operating and main-taining these structures is $2.0 million annually. The Board does not face as much risk with the West Closure project as with the Permanent Pump Stations because the Board is not the lead entity like it is with the Permanent Pump Stations. 2.6.4 Replacement of Aging Power Equipment The drainage pump stations in Orleans Parish are powered primarily by a 25-cycle electric power system operated by the Board. The advantage to this system is that it provides a reliable source of power for these facilities, since the pub-lic power system de-energizes its transmission lines during periods of high winds – the time when the power is most needed by the Board. The disadvantage to this system is that it is different from the standard 60-cycle power gener-ated by the public power system.

An electric power system is composed of a generation com-ponent to produce the power, a transmission component to move the power to where it is needed, and a distribution component to connect the power to individual facilities.

removal of rain water from the canals. These improve-ments add approximately 22,000 cfs capacity to the existing capacity of 50,000 cfs. The Project Partnership Agreement outlines and affirms each organization’s commitment and responsibilities for the project. The Corps is responsible for design and construction of the three federally-funded permanent outfall canal structures. The Board will assume operations and maintenance of the structures upon com-pletion of construction. The estimated cost of operating and maintaining these structures is $10.0 million annually. Since the Board is responsible for the O&M, it faces the risk associated with rising operating costs. The Board also bears the responsibility of repair and rehabilitation of the Permanent Pump Stations.

2.6.3 Gulf Intracoastal Waterway (GIWW) West Closure ComplexThe Corps is building and upgrading facilities for the West Bank of New Orleans and vicinity as part of the Hurricane and Storm Damage Risk Reduction System. The Gulf Intracoastal Waterway - West Closure Complex will span Jefferson, Orleans, and Plaquemines parishes. Located at


and (3) phase out the SWBNO power system and utilize the public power system. There are significant advantages and disadvantages to each of these alternatives. The Board has not performed a recent life-cycle cost analysis of these alter-natives. However, based on the lowest initial capital outlay and ease of implementation, the Board staff currently favors the option to rebuild the SWBNO power plant with another 25-cycle plant until other alternatives are more cost effective and can be more easily implemented. Board staff intends to comprehensively evaluate the life-cycle costs and relative risks of these alternatives in order to prepare a recommenda-tion for the most reliable, cost-effective future power supply for the drinking water treatment plants, sewerage treatment plants, sewerage pump stations, and drainage pump stations in Orleans Parish. There have been over 600 outages from the energy provider since Hurricane Katrina. Staff believes that a risk analysis would eliminate alternative 3.

The power system operated by the Board consists of one 25-cycle generation facility and transmission lines buried underground to Board facilities. The Board does not dis-tribute this power to any non-Board facilities.

The Board’s power plant was extensively damaged during Hurricane Katrina and portions of the plant have since been repaired or replaced using FEMA funds. The power plant has continued to operate well beyond its original design life through extensive maintenance performed by Board staff. As a result of damage to portions that have not yet been repaired as well as the age of the remaining portions that have not been replaced, it is necessary to con-template significant investments to rebuild the power plant.

The alternatives for rebuilding the power plant are: (1) re-place 25-cycle generation equipment within the existing power plant building; (2) build a new 60-cycle power plant;


3.1 DataSourcesIn order to develop the revenue requirements for the water, sewerage, and drainage systems, it was necessary to identify the overall revenue requirements for each of the systems. The following data sources were used to compile the rev-enue requirements:

> 2011 Comprehensive Annual Financial Report (CAFR); > 2012 – 2020 Capital Improvement Program; > Detailed debt service schedules for each outstanding

bond issue; > Estimated debt service schedules on outstanding

Gulf Opportunity Zone (GO Zone) Loans as de-ferred by five years;

> Estimated debt service schedules on outstanding Special Community Disaster Loans (SCDL) por-tions which have not been cancelled; and

> Estimated debt service schedules for SELA Flood Control Program Loans.

In addition to these data sources, the Project Team per-formed site visits to certain components of the systems and conducted interviews with Board staff members engaged in operating and maintaining the Board’s facilities. The Project Team also performed a review of the capital program for validation purposes. This review indicates that the capital planning process used by the Board is consistent with indus-try practices and that the anticipated costs associated with the capital projects are appropriate. Board staff also pro-vided additional information over the course of the project that has been incorporated into the revenue requirements. This analysis found that in general the Board is understaffed relative to industry metrics.

There are two critical components in the development of user rates and charges: 1) revenue requirements and 2) billable units. The Board must establish a viable and com-prehensive funding plan to meet its obligations related to its various capital projects, annual system repair and reha-bilitation expenditures, and the Board’s prospective O&M expenses. Procedurally, annual expenses are projected over the forecast period. These expenses include appropriate al-locations of the Board’s O&M expenses dedicated to each system function and outlays for capital financing – funded through debt, current revenues or other sources. Revenue requirements represent the amount of money the Board must raise annually, net of other sources of funding, to support the planned expenditures of its systems – whether through rates (fixed and volumetric), millages, or drainage fees.

For this study, system revenue requirements are developed under the cash basis approach for utility rate setting. The cash basis approach is typically used for publicly-owned utilities. Under the cash basis approach, annual revenue requirements include:

> Operating and maintenance (O&M) expenses; > Debt service (existing and future); > Cash funded capital requirements; > Contributions to reserves; and > Other obligations of the systems (e.g., obligations to

other City funds and legal settlements).

For rate setting purposes, revenue requirements were de-veloped separately for the water, sewerage, and drainage systems. Revenue requirements are based on actual results for 2011 and are projected for 2012 through 2020.

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REVENUE REQUIREMENTS


to systems. Other allocations were based on interviews with Board staff knowledgeable about the particular activity for which costs were being allocated. Overall, RFC developed allocations based on the best available data at the time, and it is reasonable for these allocations to be used by the Board in the future for cost allocation purposes. However, the Board should reexamine these allocations periodically to ac-count for changes in O&M activities.

A summary of the detailed O&M cost allocations developed by RFC is included in Appendix D and the detailed O&M budgets are included in Appendix E of this report.

3.3 OperatingandMaintenanceExpensesThe total projected baseline O&M expenses for the water, sewerage, and drainage systems are shown in Table 3.1. Overall, baseline O&M expenses are projected to increase approximately $50.5 million or an average of 3.5% annually over the ten-year forecast period from approximately $139.8 million in 2011 to $190.3 million in 2020.

Projected expenses increase at a rate marginally above assumed inflation rates, which reflects higher escalation factors for selected factors (e.g., benefits and commodities). Projected O&M expenses are distributed across the Board’s operating divisions roughly uniformly over the forecast pe-riod owing to the use of common escalation factors across all operating divisions.

3.2 OperatingandMaintenanceAllocationFor the cost of service analysis, the Board’s estimated actual total operating and maintenance expense for 2011 (for all three systems: water, sewerage, and drainage) was used as the basis for projecting O&M costs for 2012 through 2020. As a baseline, the Board’s O&M costs were escalated at an annual rate of 3%, except for healthcare, fuel, utilities, and chemicals, which were escalated at an annual rate of 5% to reflect the greater cost increases seen in these categories in recent years. Another component of the study was to eval-uate the O&M to determine if the current level of O&M was appropriate relative to industry standards.

To allocate the Board’s costs among water, sewerage, and drainage activities, RFC worked closely with Board staff in reviewing each activity in the Board’s O&M budget to determine how those costs relate to each of the water, sewerage, and drainage systems. Some of these allocations were relatively straight-forward (e.g., 100% allocated to a single activity). Many of the functions required a more de-tailed analysis of the activities performed to determine an appropriate allocation of costs across the systems. Where possible, RFC worked with Board staff to identify specific quantitative data that would provide an accurate allocation of costs. For many maintenance activities, the Board pro-vided RFC with historical work order data for each activity broken down between the water, sewerage, and drainage systems, which provided a reasonable basis for allocations

Table 3.1 – Projected Baseline O&M Expenses


the long-term viability of the Board’s water system and this was confirmed by the Project Team’s O&M Review analysis. The Project Team further examined the O&M expenses using benchmarks from the American Water Works Asso-ciation publication Benchmarking Performance Indicators for Water and Wastewater Utilities (2006) and found that the Board is spending less than the most efficient quartile of utilities in terms of O&M expenses on a per million gallons basis of water treated. The Project Team set a goal of align-ing the O&M expenditures for the water system to the most efficient quartile benchmarking, meaning that the Board would be spending more than 25% of comparable utilities, but less than 75% of comparable utilities, on a cost per mil-lion gallons basis.

The benchmark results from 2006 were escalated to 2016 levels at a rate of 3% per year and the additional expense is added over five years, from 2012 to 2016. Benchmark level O&M expenses, projected baseline 2016 O&M, and the in-cremental annual O&M are shown in Table 3.3.

Baseline Water ExpensesA ten-year summary of the allocation of projected O&M expenses to the water system is shown in Table 3.2. Over-all, baseline water system O&M expenses are projected to increase approximately $24.4 million or at a 3.6% av-erage annual rate over the ten-year forecast period from approximately $64.6 million in 2011 to $88.9 million in 2020. Projected O&M expenses are distributed across the Board’s operating divisions roughly uniformly over the forecast period owing to the use of common escala-tion factors across all operating divisions. The Division of the General Superintendent incurs over two-thirds of the water system O&M expenses; almost 15% of expenses are incurred by the Management Services Division; and the remaining expenses are distributed roughly equally across the Divisions of the Executive Director, Support Services, and Payroll Related.

Additional Water ExpensesBoard Staff indicated to the Project Team that O&M ex-penses are not being funded at a level adequate to ensure


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System BenchmarkO&M(permilliongallons)ProjectedMillionGallonsTreated

BenchmarkTotalO&M

ProjectedBaseline2016O&M

AdditionalIncremental2016

O&M

Water $1,502 52,734 $79,233,000 $76,380,000 $2,853,000

Table 3.3 – Benchmark Water O&M Expenses

O&M expenses using benchmarks from the American Water Works Association publication Benchmarking Per-formance Indicators for Water and Wastewater Utilities (2006) and found that the Board is spending less than the most efficient quartile of utilities in terms of O&M ex-penses on a per million gallons basis of sewerage treated. The Project Team set a goal of aligning the O&M expendi-tures for the sewerage system to the most efficient quartile benchmarking, meaning that the Board would be spending more than 25% of comparable utilities on a cost per million gallons basis.

The benchmark results from 2006 are escalated to 2016 levels at a rate of 3% per year and the additional expense is added over five years, from 2012 to 2016. Benchmark level

For the water system, baseline 2016 O&M projections were $76.4 million. To achieve the benchmark target of $79.2 million, the additional O&M costs are slightly less than $2.9 million.

Baseline Sewer ExpensesA ten-year summary of the allocation of projected O&M expenses to the sewerage system is shown in Table 3.4. Overall, sewerage system O&M expenses are projected to increase approximately $13.3 million or a 3.0% average annual rate over the ten-year forecast pe-riod from approximately $43.1 million in 2011 to $56.4 million in 2020. Projected O&M expenses are distributed across the Board’s operating divisions approximately uni-formly over the forecast period due to the use of common escalation factors across all operating divisions. The Divi-sion of the General Superintendent incurs almost 40% of the drainage system O&M expenses; over a quarter of the expenses are incurred by the Treatment Division; over 20% of the expenses are incurred by the Management Serv-ices Division; and the remaining expenses are distributed roughly equally across the Divisions of the Executive Di-rector, Support Services, and Payroll Related.

Additional Sewerage ExpensesAs with the water system, the Project Team examined the


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incurs almost two-thirds of the drainage system O&M expenses; almost 15% of expenses are in-curred by the Support Services Division; and the remaining ex-penses are distributed roughly equally across the Divisions of the Executive Director, Management Services, and Payroll Related.

Additional Drainage ExpensesIn addition to the existing ex-penses, the Board’s O&M expenses will increase significantly due to O&M associated with the capital projects discussed earlier. The Board will be responsible for ad-ditional O&M expenses associated with the Permanent Pump Stations, which are a component of the

SELA projects. Due to the Permanent Pump Stations, the Board has estimated that it will incur $2.0 million in addi-tional costs annually beginning in 2015 and another $8.0 million annually beginning in 2016. This O&M expense is anticipated to increase 3.75% annually. The West Closure project is also expected to be completed soon and the Board will be responsible for a portion of certain O&M expenses, such as power for the pumps, associated with the project. The O&M expense associated with the West Closure project has been estimated to be $2.0 million annually beginning in 2013 and also escalating 3.75% annually. 3.4 CapitalImprovementPlansThe Board’s Capital Improvement Plans, which are in-cluded as an attachment to Appendix C, provide for nearly $2.1 billion in capital investment in the water, sewerage, and drainage systems, in 2011 dollars for the 2012 to 2020 period.

O&M expense, projected baseline 2016 O&M, and the in-cremental annual O&M are shown below in Table 3.5.

For the sewerage system, baseline 2016 O&M projections were $50.8 million. To achieve the benchmark target of $70.3 million, the additional O&M costs are $19.5 million.

Baseline Drainage ExpensesA ten-year summary of the allocation of projected O&M ex-penses to the drainage system is shown in Table 3.6. Overall, drainage system O&M expenses are projected to increase approximately $12.8 million or a 3.8% average annual rate over the ten-year forecast period from approximately $32.1 million in FY 2011 to $44.9 million in FY 2020. Projected O&M expenses are distributed across the Board’s operating divisions roughly uniformly over the forecast period owing to the use of common escalation factors across all operat-ing divisions. The Division of the General Superintendent

System BenchmarkO&M(permilliongallons)ProjectedMillionGallonsTreated

BenchmarkTotalO&M

ProjectedBaseline2016O&M

AdditionalIncremental2016

O&M

Sewerage $1,953 36,011 $70,300,000 $50, 763,000 $19,537,000

Table 3.5 – Benchmark Sewerage O&M Expenses


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3.4.1 Water Capital Improvement PlanThe Board’s CIP provides for approximately $460.0 million in 2011 dollars in capital investment in the water system. The water CIP will be funded prima-rily by the Board, but approximately $213.5 million will be financed by other sources such as federal grants, meaning that the Board will be responsible for financing $246.5 million with current revenues or debt issuances. A summary of the projected an-nual water CIP is shown in Chart 3.1.

3.4.2 Sewerage Capital Improvement PlanThe Board’s CIP include approximately $483.9 mil-lion for the sewerage system from 2012 through 2020 period. The CIP will be funded primarily by the Board, but approximately $123.4 million will be financed by other sources such as federal grants, meaning that the Board will be responsible for financing $360.5 million with current revenues or debt issuances. A summary of the projected annual sewerage CIP is shown in Chart 3.2. The wastewa-ter system capital improvement plan includes significant costs in the initial years of the plan in order to satisfy the consent decree.

3.4.3 Drainage Capital Improvement PlanThe Board’s CIP provides for approximately $1.1 billion in capital investment in the drainage system through the 2012-2020 period. It is important to note that a vast majority of these projects will be funded through SELA, so the Board will not have to provide the full up-front capital funding for these projects and will be required to repay only 35% of that funding through a special long-term repayment arrangement with the federal govern-ment. A summary of the total construction cost of projects to be initiated each year is shown in Chart 3.3. Of the $1.1 billion, approximately $820.7 mil-lion will be financed through other sources such as SELA and FEMA program funds.

Chart 3.1 – Water Capital Improvement Plan (in 2011 dollars)

Chart 3.2 – Sewerage Capital Improvement Plan (in 2011 dollars)

Chart 3.3 – Drainage System Capital Improvement Plan (in 2011 dollars)


estimates has declined, so the Board’s consumption data has become more reliable. Nonetheless, actual 2011 revenues served as the baseline revenues for water and sewage.

The assumption of additional continued growth was also a factor in determining the growth projection. The Project Team also used a resistance factor to dampen projected wa-ter and sewerage demand. The resistance factor effectively incorporates price elasticity and the trend of decreasing per capita demand due to conservation efforts and more effi-cient water fixtures. Table 4.1 shows the growth factors and resistance factors applied by year for water and sewerage.

Table 4.2 shows the change in revenue for water and sewer-age based on the growth factor and the resistance factor, but excluding the rate increases. As can be seen, water revenue decreases over the period, while sewerage revenue increases over the period. In both cases, revenue decreases in the first few years, when the resistance factor is the greatest. As the resistance factor decreases, revenues begin to increase. The reason that water remains below the initial level of revenues while sewerage surpasses the initial level is that the water fixed charge is much lower than the sewerage fixed charge. Water revenues are more dependent on usage, and since the resistance factor is greater than the growth factor for the first half of the projection period, the water revenues are more negatively affected than the sewerage revenues.

The second critical component for rate and fee develop-ment is the projection of billable units. Since the Board has a fixed charge and a volumetric charge, there are two types of billable units: 1) account (fixed); and 2) demand (volumetric). In simple terms, the volumetric rate is com-puted as the revenue requirements to be recovered through a volumetric rate divided by the volumetric billable units. For water and sewerage service, volumetric billable units are a function of water demand. Almost all water utilities bill per thousand gallons or per hundred cubic feet of water consumption as determined through water meter readings. The most common approach for sewerage is to determine billable units based on a percentage of metered water con-sumption. Drainage service is not a function of water usage, so typically it is billed based on property size, property value, or amount of impervious area.

Typically, the projection of account and demand billable units is based on historical data. Evaluating billing data from prior years allows for a projection of billable units in the upcoming year and provides an idea of the trend in consumption. The Board provided billing data from its Customer Account Management System.

Following Hurricane Katrina, the Board has needed to estimate usage for a high percentage of accounts due to a shortage of meter readers and restricted access to me-ter vaults from storm debris. Each year the number of

4

BILLABLE UNITS


Table 4.1 – Growth and Resistance Factors

Table 4.2 – Water and Sewer Revenues Excluding Rate Increases

Water SewerGrowth Factor Resistance Factor Growth Factor Resistance Factor

2012 1.25% -3.00% 1.25% -3.00%2013 1.25% -3.00% 1.25% -3.00%2014 1.25% -2.00% 1.25% -2.00%2015 1.25% -2.00% 1.25% -2.00%2016 1.25% -1.00% 1.25% -1.00%2017 1.25% -1.00% 1.25% -1.00%2018 1.25% -1.00% 1.25% -1.00%2019 1.25% -1.00% 1.25% -1.00%2020 1.25% -1.00% 1.25% -1.00%

Water Sewer2011 57,680,747$ 68,921,008$ 2012 56,649,704$ 68,579,901$ 2013 55,637,090$ 68,256,133$ 2014 55,205,903$ 68,334,055$ 2015 54,778,057$ 68,419,051$ 2016 54,908,155$ 68,889,679$ 2017 55,038,562$ 69,365,359$ 2018 55,169,278$ 69,846,150$ 2019 55,300,305$ 70,332,114$ 2020 55,431,644$ 70,823,312$


preparing the bill, receiving payment, meter repair, and meter replacement.

3. Billing, Meter, and Readiness to Serve Charge – costs associated with preparing the bill, receiving pay-ment, meter repair, meter replacement, and having the capacity available to provide service as necessary (readi-ness to serve).

Since these monthly service charges include different costs, they are developed using slightly different approaches

Billing ChargeSome utilities recover only basic billing and customer service costs through a monthly service charge. These costs include meter reading, hardware and software to calculate bills, printing, postage, customer service, and cashiering. Since these costs do not vary materially from customer to customer, all customers have the same charge. This charge can be calculated by dividing the billing reve-nue requirement by the total number of bills sent annually. For example, if 100,000 accounts are billed monthly, then 1,200,000 bills are sent annually. If the billing revenue requirement was $2,400,000, then the monthly billing charge would be $2.00.

Billing and Meter ChargeThis charge includes not only the billing charge but also a charge for costs associated with the meter, such as test-ing, repair, and periodic replacement. Many utilities have a meter shop, and the cost of this part of the organization would be included in the meter revenue requirement. Larger meters are more costly to test, repair, and replace, so the meter costs should not be allocated equally among the

Another objective of the Project was to evaluate the water and sewerage rate structures to determine if any modifica-tions were necessary for improvement. In evaluating rate structures, it is important to do so in two dimensions: 1) the allocation between the fixed and volumetric compo-nents and 2) the structure within the fixed and volumetric components. The Project Team evaluated the Board’s water and sewerage rate structures in each of these dimensions.

Once the revenue offsets (such as miscellaneous fees revenues and interest earnings) have been identified and removed from the revenue requirements, the utility is left with the revenue requirements that must be recov-ered through direct user charges. Most utilities have two user charges, a fixed charge and a volumetric charge. The fixed charge is not a function of the amount of water used or sewerage discharged. It provides revenue stability to the system because it is charged regardless of usage. The volumetric charge is a function of water usage (or assumed sewerage discharged). There are some utilities that have solely fixed charges (flat rate structures) and some that have only volumetric charges. However, the trend is to have both charges, as the Board currently has.

5.1 FixedChargeWithin the industry, there are three primary types of fixed charges, or monthly service charges as called by the Board. The types of monthly service charges are differentiated by the inclusion of different costs.

1. Billing Charge – costs associated with preparing the bill and receiving payment.

2. Billing and Meter Charge – costs associated with

5

RATE STRUCTURE


flow. In other words, the costs are allocated solely through the readiness to serve approach. Developing the monthly service charges in this manner is generally justified because the readiness to serve charge is typically the largest compo-nent of the fixed monthly revenue requirements.

5.2 VolumetricRateStructureThere are three basic volumetric rate structure components: 1) declining block (usage in the next usage block is charged at a lower price per unit); 2) uniform (all usage is charged at the same price per unit); and 3) increasing block (usage in the next usage block is charged at a higher price per unit). These rate structure components can be uniquely estab-lished in an infinite number of combinations. Many utilities have separate rate structures for different customer classes. For example, there may be one rate structure for residential customers and a different rate structure for non-residential customers. It is also possible to have a rate structure that is a hybrid that includes both declining and increasing block components. Many utilities that have a single rate structure for all customers have this type of a rate structure because it generally provides a good representation of cost of service. It includes a conservation component at the lower usage lev-els that primarily applies to residential customers, while it provides lower rates for customers that use significant water because these customers typically have a lower per unit cost impact on utilities.

5.3 CurrentWaterRateStructureThe Board currently charges customers monthly for water service through two fees, a Water Service Charge and a Wa-ter Quantity Charge.

5.3.1 Water Service ChargeThe Board has a monthly water service charge that includes billing, meter, and readiness to serve components. Based on the current differentials between meter sizes, it appears that the Board has historically used a hybrid approach that most closely resembles the readiness to serve approach. There might be a slight benefit in equity from adjusting the monthly service charges to be more consistent with one of the traditional approaches. However, making such adjust-ments would result in customers facing differing impacts. The Project Team recommends maintaining the current structure and differentials because the slight potential gain in equity would be outweighed by the potential ramifica-tions of changing the differentials. Table 5.1 summarizes the current monthly Water Service Charges.

meters. Instead, the standard approach is to determine meter cost equivalents and divide the meter revenue re-quirement by the total number of meter cost equivalents. AWWA provides some guidance as to the cost of different size meters. Therefore, if a 4-inch meter costs 14 times as much as a 5/8-inch meter, then a 4-inch meter would have a cost equivalent of 14 and would be allocated 14 times the unit meter cost. The Billing and Meter charge would then be the sum of the billing charge and the meter charge. As an example, assume the 100,000 accounts have total meter cost equivalents of 120,000. If the allocated meter cost was $4,320,000, then the unit meter cost would be $36 annually (or $3 per month). The meter cost would then be added to the billing and meter charge. So for a 5/8-inch meter, the billing and meter cost would be $5 per month. However, again assuming a 4-inch meter costs 14 times as much as a 5/8-inch meter, the monthly billing and meter cost for this meter would be $2 + (14*$3) = $44.

Billing, Meter, and Readiness to Serve ChargeThis charge includes a readiness to serve component in addition to the billing and meter charge. Water and sewer-age utilities are very capital intensive businesses. In other words, it requires significant capital costs to be able to pro-vide water and sewer service to a utility’s customers. These costs must be recovered whether customers use water or not, so there is justification for recovering the costs related to providing this capacity in case a customer decides to use water. As with the meter charge, all meter sizes are not equal regarding a readiness to serve charge, since a utility has to be sized to handle the potential capacities. Again, AWWA provides guidance as to the capacities of different meter sizes. Since a 4-inch meter can handle 25 times the flow of a 5/8-inch meter, then a 4-inch meter would have an equivalency of 25 and would be allocated 25 times the unit readiness to serve charge. As an example, assume the 100,000 accounts have total meter capacity of 150,000. If the allocated readiness to serve charge revenue require-ment was $9,000,000, then the unit readiness to serve cost would be $60 annually (or $5 per month). The readiness to serve amount would be added to the billing and meter charge. So for a 5/8-inch meter, the total monthly fixed charge would be $10. For a 4-inch meter, the monthly fixed charge would be $2 + (14*$3) + (25*$5) = $169.

To simplify the calculation of fixed service charges, many utilities identify the total monthly charge revenue require-ments and divide by the meter equivalents based on meter


The Project Team believes the existing rate structure is con-sistent with cost of service principles and promotes efficient water use. The Project Team recommends maintaining the existing rate structure. As the system leakage is reduced and reaches an equilibrium, RFC recommends that the Board evaluate whether a modification in the rate structure is then warranted. The Board might also consider having a separate rate schedule for residential and non-residential customer classes. This modification would allow the Board to move away from an IB/DB rate structure, which can be confusing to the ratepayers.

5.4 WholesaleChargeThe Board currently has a separate uniform rate structure for its

Documents

SEWERAGE AND WATER BOARD OF NEW ORLEANS · 2018-08-23 · Sewerage and Water Board of New Orleans - 2 - Financial Plan and Rate Study 2011-2020 escalation will result in the systems’